Netflix (NFLX 2.44%) has long been a market darling, but lately the stock can't seem to do anything right.
After shares tumbled in January on a weak fourth-quarter earnings report, Netflix plunged again, hitting a four-year low Wednesday as it said it lost 200,000 net subscribers in the first quarter, and management forecast a decline of 2 million in the second quarter.
As a result, Netflix shares are now down 63% year-to-date, but the sell-off shouldn't come as a surprise. Netflix had long been able to deliver consistent growth, putting up an average of nearly 30 million subscriber additions annually over the last four years, but a sudden slowdown in key metrics shows why the stock has plunged. Let's take a look at a few of the numbers behind Netflix's big sell-off.
Image source: Netflix.
Revenue growth
Netflix's revenue growth clocked in at just 9.8% growth in the first quarter and the company forecast it at 9.7% for the second quarter. Subscriber growth is even more sluggish. Year-over-year in the first quarter, subscribers grew just 6.7% and the company sees that slowing to 5% in the second quarter.
As you can see from the chart below, which doesn't include Netflix's most recent results, the company had racked up nearly seven consecutive quarters of 20%+ quarterly revenue growth, but there's a fundamental difference in a company growing in the low-20% range and in the high-single-digit range and that's reflected in the near-70% decline in the stock since its peak last November.
NFLX Revenue (Quarterly YoY Growth) data by YCharts
Netflix management has pledged to reaccelerate growth, but with much more streaming competition than it faced a few years ago, that won't be so easy. High-single-digit revenue growth could be the new normal for the company.
Operating margin
After revenue and subscriber growth, operating margin is the company's most important figure. It shows how much in profit the company is keeping before interest and taxes. Last year, its operating margin was 21%, but earlier this year the company forecast it would decline to between 19% and 20%. However, management maintained that it would grow on average by three percentage points a year as it leverages its content library into a larger subscriber base.
Now the company is backing away from that growth goal, saying that it will maintain operating margins at 20% until revenue growth accelerates again. As you can see from the chart below, operating margin had been steadily growing. Investors were banking on that trend to continue. Now, it seems like it won't.
NFLX Operating Margin (TTM) data by YCharts
Content spend is getting bloated
Netflix has ramped up content spending over the years, and now expects to spend roughly $18 billion on original TV shows and movies to power its streaming service this year, far more than any competing streaming platform.
However, there are now doubts about how much value Netflix is getting from that content spend. The chart below shows how content spending has grown over the last six years.
Image source: Author Chart per Netflix data
As you can see from the chart, Netflix's content spend has tripled in the last six years, growing at about the same pace as its subscriber base. While that might sound fine, it actually shows that Netflix hasn't found a way to make its content spending more efficient during that time, which encompasses nearly its entire history of original programming. That's a problem for Netflix and one it's likely to attack as it focuses on improving its business to drive growth and profitability.
Netflix still has levers to pull. The company is planning to launch an ad-based tier in the next year or two, and it is still miles ahead of the competition in international markets, especially when it comes to production, but these charts show that the stock plunge was well deserved.
It's now up to management to respond to the competitive threat and deliver the kind of results that investors have become used to.
